RBA Set to Raise Rates Again Amid Persistent Inflation Worries

The Reserve Bank of Australia (RBA) is expected to raise interest rates again, but inflation remains a challenge for the central bank. The RBA's credibility depends on its ability to control inflation, and it has good reason to proceed carefully as monetary policy works with a lag.

Last weekend, the author paid $70 for a rosemary and garlic butterflied chicken at a farmers' market, which is an example of how supply pressures can drive up prices. The RBA must respond not only to global supply constraints but also to domestic demand in food, housing, and healthcare.

The central bank has tried the cautious approach with modest rate rises designed to lower inflation while preserving labor market strength. However, this approach has not worked as core inflation is growing at 3.6% in the year to July, above the RBA's 2-3% target for nearly 70% of the time since 2021.

Reserve Bank Governor Michele Bullock said that the current 4.5% unemployment rate may need to sit between 4.5 and 5% to get inflation under control. The decision rests with the Monetary Policy Board, but recent language suggests the staff are pushing for a rate rise next week, with another increase in November still on the table.

The RBA's credibility is at risk if it fails to convince households and businesses that it is serious about inflation. If the central bank waits too long, households and the broader economy will ultimately bear the cost of restoring credibility.